Collection Tactics

The best way to execute this type of approach is to immediately let them know when a new job hits your shop. Make the call that very day to the person ordering the job, letting them know their account is overdue and that, as a result, the current job is in jeopardy. They, then, can help you communicate with their own accounting department. After all, they are the ones that really need you to release the job, not the accounting department. This will give you a few days leeway for your client to work out payment arrangements. (Typically, by the way, the person ordering the job has no idea the account is overdue.)

Our business has had this policy for several years and all of our customers, including our top ones, know about it and understand it. Adopting a specific policy such as this – and enforcing it – will help your slow-paying clients understand that in order to do business with you they’ll have to pay on a timely basis. Again, this approach shouldn’t make you nervous about your relationship with your customers – it’s a reasonable request to be paid on time for your products and services.

Assigning risk ratingsMy final recommendation is something we have recently implemented here at Ferrari Color. We’ve gone through our top 25 clients, which make up the majority of our sales and our accounts receivable, and have assigned each one a risk rating between 1 and 5. If a customer is assigned a risk rating of 1, the highest risk, they are handled very carefully in terms of issuing any significant amount of credit. On the other hand, we should be comfortable that a customer with a risk rating of 5 will pay on time, without issues.

Importantly, our risk rating is actually a mix of two different types of risk. The first is simply an assessment of their financial health, payment history, average days outstanding, etc.

The second risk factor, however, takes into account the impact that the customer would have on our business if they were to file for bankruptcy at any given time and their account balance would have to be written off. This is a much scarier assessment when considering our largest clients. For example, our top two or three customers might typically pay within a reasonable amount of time, but the financial impact of writing off their balance as bad debt would be huge. So those customers may not be the highest risk because they pay on time, but they earn a 2 or 3 risk rating because of the impact their failure would have on our bottom line.

After categorizing your top customers, the idea is to then appropriately manage each customer-risk pool. That could include monthly financial credit reports, weekly calls on outstanding balances, securing personal guarantees from business owners, predefining down-payment requirements on larger jobs, securing credit cards as payment security, or anything that might mitigate your risk.

With a large customer, such as a publicly traded company, many of these options are probably not available. So, instead, we review the quarterly financial results when earnings are released and try to determine the overall health of the company (or, in some cases, the parent company). Just because a company is big and public, don’t be fooled into thinking you’re immune from their account going bad – big companies go out of business all the time. The point here is to adopt a system where you are trying your best to protect yourself from something happening that might place your business in peril.